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Aug. 28 2007 04:21 PM

In the last issue of PARCEL, I talked about companies achieving competitive advantage by sticking to their core competencies and outsourcing non-core competencies to supply chain partners. In this article, I would like to talk about how companies achieve competitive advantage by not trying to be all things (i.e., offering all products/services) to all potential customers.

 

The first step is to realize that not all customers are created equal some are critical to our success, some are less important and should be treated as such, and some are distracting us from serving the first two groups and should not be served at all (and many of our suppliers see us in the same light). To understand these segments of customers, companies first need to answer several questions about their supply chains:

>> Who is our customer?

>> How do we reach our customer?

>> How do we reach competitive advantage with our customer?
    (Hint: It is not always the product)

 

As the first question indicates, identifying the relevant customer is the first step. Once we identify who the customer is, we must identify what the customer values, choose the customer values that we will emphasize, provide that value to the customer, communicate to the customer the fact that we are providing that value and finally (and continuously) assess the customers satisfaction with the value that we are delivering. The same process can be used to make certain our key vendors see us as key customers, as well.

 

Real-World Examples

This is true in business-to-business (B2B) and business-to-customer (B2C) supply chains. Many companies in consumer products industries, when asked, Who is your consumer? will say, The individuals who buy our products. When asked, Who is your customer? they will say, Wal-Mart, Target, CVS Drugstore, Best Buy, Circuit City or various other retailers that often represent a significant percentage of their overall sales. One company in the consumer products goods industry is a dramatic example of the 80/20 rule gone crazy. The 80/20 rule says that 80% of your business typically comes from 20% of your customers. However, for this manufacturer of consumer products goods, 90% of its overall North American sales went through only 10 customers, those 10 customers being 10 big retailers. In Europe, 60% of the sales went through only four customers, again big retailers. Clearly, this company had millions and millions of final consumers, but only a very small number of customers it had to worry about to create competitive advantage in its supply chains. Thus, much of its effort is spent building key vendor status for the company with these key retailers.

 

Similarly, the CEO of a large telecommunications equipment company once made the comment to me that, We can never forget that we are a multi-billion dollar global company, but we only have 114 customers we darn well better keep those customers satisfied. Some customers are, quite simply, more important to us than others. Some customers represent such a large percentage of our sales that we should think about ways to create competitive advantage, not for our products, but for our products sold through those customers.

 

Again, the same is true of vendors. One large global manufacturer is literally facing the situation today of saving one of its major vendors from bankruptcy (bankruptcy it helped force upon the supplier by pushing supply chain costs back on them and then demanding price concessions), since the company cannot make its products without the key component from the vendor.

 

How to Create Value?

The answer to the question of creating value for key customers and vendors often involves more than just the product. We may make a product that is priced no differently than the competition, has no different brand equity than the competition and is promoted no differently. In fact, the product looks, for the large part, like a commodity. There, seemingly, is no basis on which to compete, other than price. However, if we create a cluster of services around a product through the supply chain and through trade partners (such as parcel delivery companies) that gives our company a distinct advantage in the marketplace not product-based, but supply chain service-based then we are achieving this supply chain competitive advantage idea.

 

Furthermore, not all products/services contribute equally to the profitability of a company or a supply chain. In fact, many supply chains keep in stock a multitude of products (or offer a multitude of services) that should be discontinued for lack of sales. As one supply executive put it, We are great at introducing new products but terrible at killing off loser products. This executive works for a company that makes telecommunications products. Analysis of its sales patterns revealed that one product that consumers buy has 2,200 different versions each version has to be kept in stock in case someone orders it but the final consumer cannot tell the difference in the features of any of these 2,200 different versions! Thus, this company keeps introducing variations of this product and spends millions of dollars stocking all the variations in inventory when the customer could not care less about the variations.

 

Too many products/services leads to overly complex supply chains, often with interesting results. One retail supply chain, through which an electronics company sells, does not work closely with the company to coordinate supply chain functions. In fact, an executive for the company showed us a report received weekly from this retailer, detailing how much inventory of each Company B product this retailer has in stock. Our reaction was, This is great. This retailer is finally starting to share supply chain information with you.

 

The reaction from management was not so sanguine. You dont understand. This report has inventory information for the 1,300 Company B products this retailer has in stock, but we only sell 670 products to them. The other 630 are products we do not even make any longer, and this retailer still carries them in stock! Clearly, the retailer in this supply chain was not conducting on-going analysis of sell-through by product, and subsequently not getting rid of the inventory that no longer sold (but still cost money to keep in stock).

 

Similarly, many parcel delivery companies offer a confusing array of services to their customers, without a thorough analysis of which customers are the most profitable and which services are most critical to those customers.

 

It is a difficult management responsibility to constantly assess the value of customers, vendors and products/services and manage them accordingly. Remember, though, if it were not difficult to accomplish, it would not be a source of competitive advantage. Anything that is easy to do is quickly copied by the competition and, thus, is not a competitive advantage. The challenge to supply chain managers is to change the motivation and compensation of key executives, both within the company and in supply chain partners, to treat some customers, some vendors and some products/services as more equal than others. It is this topic of motivation and compensation that will be addressed in the next issue.

 

John T. Mentzer, Ph.D., is a distinguished professor of business in the Department of Marketing and Logistics at the University of Tennessee. He can be reached at 865-974-1652 or jmentzer@utk.edu.

 

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